Did Carl Icahn Really Drop the eBay Proxy Battle?

In an interview on CNBC, eBay (NASDAQ: EBAY) CEO, John Donahoe, essentially said that billionaire activist investor Carl Icahn's decision to drop its proxy battle to split PayPal was because Icahn didn't fully understand the fundamentals, but now sees the potential. Icahn, who has made billions by battling boards, is one of the most well-respected investors of all time.

Therefore, the notion that he didn't understand the fundamentals, or suddenly changed his mind, didn't seem quite right. Instead, perhaps he knew it was a fight he couldn't win, or even worse, PayPal's valuation could drop with companies like Facebook (NASDAQ: FB) now entering the space, leaving it to compete against Amazon (NASDAQ: AMZN) alone.

A fight he couldn't win?Anyone who saw the epic Carl Icahn versus Bill Ackman showdown on CNBC is fully aware that the 78-year-old Icahn won't back down from a good fight. Therefore, it seems rather strange that Icahn would just drop the battle for a split of PayPal, a separation that makes sense fundamentally.

eBay is a company that's split into two segments: Marketplace and PayPal. The logic in splitting PayPal was that Marketplace has become a laggard that is weighing down PayPal's full value. eBay's Marketplace accounts for nearly 60% of the company's total revenue, but grew just 12% in 2013, and many analysts believe that Marketplace's growth could fall below the 10% mark as early as this year.

In comparison, Amazon has an annualized growth rate of nearly 30% over the last three years. Looking ahead, analysts expect Amazon to grow 20% over the next two years, and while many will point to the fact that Amazon Web Services is becoming a larger piece of its pie -- AWS is expected to create $9 billion in 2015 -- this segment will remain less than 10% of Amazon's total business for several years. Hence, it's Amazon's dominance in e-commerce that continues to pressure Marketplace, and is likely why Marketplace's growth is becoming more difficult.

Icahn and other investors believed that a split with two independent CEOs and boards would be more beneficial to shareholders. It would give each segment more attention and allow for better innovation and further expansion of PayPal.

In evaluating eBay, PayPal is its gem. It accounted for 41.3% of total revenue and grew 19% last year. PayPal also has more than 140 million users and created most of eBay's $2.86 billion in net income during the last 12 months. Therefore, Reuters estimates the value of PayPal to be $40 billion, or nearly 60% of the total company.

Is competition an obvious threat?In a previous article, it was explained that, if the market were willing to pay 30 times earnings for PayPal, its valuation could match eBay's. Given the premium paid for growth, such a multiple is not unrealistic. Therefore, with this logic in mind, why would Icahn drop the proxy battle and why aren't more investors jumping on board?

The answer might be the fact that tech giants are preparing to battle eBay for dominance in the space. The newest tech giant preparing to enter the space is Facebook; the Financial Times reported on Monday that the social media company is preparing to launch an electronic-money service. Reportedly, Facebook will launch in Ireland and is close to gaining approval from the Central Bank of Ireland to allow customers to store, pay, and exchange currency through its platform.

What could this mean for eBay and Facebook? First, one of the reasons that Icahn sought a PayPal split was because it's too connected to eBay's Marketplace, and for years many investors have asked that eBay attempt to make PayPal an independent payment platform. Yet, eBay executives see the platform as an edge in a competitive market.

Still, with Marketplace being PayPal's main platform for use, it has managed to attract 143 million users, and the company is now guiding for PayPal to become a $10 billion a year business by 2015.

Facebook has 1.2 billion users, and most of the world's largest companies already have Facebook pages. Hence, it shouldn't be hard for Facebook to create a mobile payment system that these businesses will accept.

Part of the Facebook investment story has always been monetizing the largest user-base the world has ever seen. While this is just one way, if Facebook can produce the same user base as PayPal for its payment processing service, and with a similar business structure, it could create $10 billion in revenue rather quickly. Hence, with $7.87 billion in revenue last year, payment processing is very important for the company, something that could be very lucrative to the company and shareholders.

Final thoughtsFacebook alone in the payment processing industry could be catastrophic to PayPal, simply because of how many people use the social networking platform. Not to mention, there are a slew of other tech giants who have expressed interest in this space, along with some innovative CEOs like Larry Page, Tim Cook, and most recently Jeff Bezos.

Therefore, why did Icahn suddenly drop the proxy battle? Was it because he was afraid or didn't want to fight? When you factor in all the known elements, and the technology juggernauts wanting a piece of PayPal's pie, it might have been because of the valuation-crippling hurricane that's coming. In other words, PayPal may not be valuable much longer.

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